The Institute for Supply Management said yesterday that its service sector index climbed in November from the month before, providing more evidence of resilience in the American economy. The measure ticked up to 56.5 from October’s 54.4, remaining well above 50, the threshold between expansion and contraction. Investors reacted badly, boosting bets on more hikes from the Federal Reserve, buying the dollar, and selling risk-sensitive currencies en masse.

Markets look rudderless this morning, with the greenback holding ground as the other majors turn in a mixed performance. Yields are stable after yesterday’s jump, and equity futures are pointing to a softer open.

The Reserve Bank of Australia raised rates by 25 basis points and warned it was prepared to tighten further – defying hopes it might signal a pause in the early new year. Governor Philip Lowe and his colleagues have raised rates by a cumulative 300 basis points this year, and housing activity has slowed, but labour markets are strong and inflation remains stubbornly elevated. The central bank’s actions have had a foreshadowing effect in this tightening cycle, anticipating policy changes elsewhere.

China’s shift away from zero-tolerance Covid policies continues, with infection counts dropping from their peaks, and several major cities announcing more relaxed testing regimes. Beijing, Shanghai, Hangzhou, and other metropolises removed test requirements for offices, supermarkets, and public transportation, but other restrictions remain in place, with schools and other facilities shuttered. Markets are incredibly optimistic, with some of the major onshore indices up more than 30 percent from their lows, and global commodity prices on a stronger footing.

Oil prices are slightly weaker, with global demand concerns outweighing supply worries as a Western cap on Russian crude goes into effect.

Today’s agenda looks terribly quiet. The US trade deficit, due at 8:30 am, is expected to hit $80 billion in October, up from $73.28 billion a month earlier.

Tomorrow’s Bank of Canada rate decision looms as the next obvious volatility catalyst, with markets betting on a 25 basis point move and economists expecting 50. With the economy showing increasing signs of stress, we think the odds should slightly favour a relatively-hawkish statement and smaller move – but there are also strong arguments to support something bigger. The Bank’s announcement is likely to trigger some position adjustment in foreign exchange markets, where the Canadian dollar has lagged gains in other major currencies over the last two months.

Karl Schamotta, Chief Market Strategist